This copy is for your personal non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients or customers, or inquire about permissions/licensing, please go to: www.TorontoStarReprints.com

Europe’s debt crisis: Spain becomes the great eurozone test case

As Spain supplants Greece as the epicentre of the euro crisis, the stakes are huge.

Monique Friede of Barcelona will soon be getting an eviction notice from the bank. After handing over the keys to her apartment, she will still owe roughly 80,000 euros of outstanding debt on the property. (Jennifer Wells / Toronto Star) | Order this photo

BARCELONA, SPAIN—It was approaching five o’clock on a Wednesday afternoon when Monique Friede made her way along Calle Obradors, a gloomy gothic alleyway a few quick minutes from Barcelona’s Rambla. Friede was wearing a loose African print dress — the cotton was cooling, she would later explain — and carried a sheaf of text-heavy papers issued by her bank.

Even in the heat of the euro crisis, and even with Spain now supplanting Greece as the epicentre of the debt bomb, the Rambla retains its honeytrap allure for tourists, with its broad and beguiling promenade and its cheap sangria. Calle Obradors, in contrast, suffers a deeply melancholic mood — most of the street is shut up tight and the light, even at this early hour, is all but spent.

Friede would enter at No. 6 and seat herself before Montse Hernando Lezcano, an impassioned Barcelona-born lawyer, who, after-hours, volunteers for Plataforma de Afectados por la Hipoteca. It wouldn’t be quite accurate to describe PAH as an association, or an organization. It’s more of a movement, one that is gaining ground daily, providing legal advice to displaced — or soon to be displaced — homeowners, while marshalling public opinion to force a change to the country’s mortgage (hipoteca) laws.

Of course, the top-line news of the day isn’t concerned with the matters of one woman who lives with her two daughters in a three-bedroom flat and whether or not she will get food on the table this evening. This month’s serial meetings of G20 and European leaders, from Los Cabos, Mexico, to Rome, to Brussels on Thursday, have been focused on the intractability of the eurozone mess broadly, a split between Germany and its supposed sister countries narrowly, and specifically in Spain’s case the still-pending €100-billion bailout of the country’s faltering banks, the details of which have yet to be fixed.

Need it be stated that Monique Friede is not in line for a bailout of her own? It is within her predicament, however, that one finds the root causes of the catastrophic state that Spain, Europe’s fourth largest economy, finds itself in.

Here’s a statistic: a tripling of unemployment in the past five years to more than 24 per cent. Youth unemployment at, virtually, 50 per cent. Exports: falling. Private consumption: falling. Recession? Yes. With Greece for all practical purposes insolvent, Spain becomes the great eurozone test case.

The news for Friede on this day is not good. Lezcano peruses the documentation from the bank, engages in a lengthy sympathetic exchange with the handsome woman in the African print dress, and concludes that the bank has, in fact, already legally repossessed Friede’s home, with an eviction notice soon to follow. Here’s the catch: even after her eviction, even after Friede hands over the keys to her modest home, she will be on the hook for the outstanding debt on the property, a sum totalling roughly €80,000 (about $103,000). That legacy debt, Lezcano explains, will destroy Friede’s ability to rent a flat, to finance a car, to arrange for credit of any kind. That is her future.

Friede, 48, offers the bare storyline of the preceding years: her arrival from Cameroon in 1990, one in a flood of immigrants to Spain at the time. The acquisition of an apartment in 2004, with a 30-year mortgage on which she and her husband paid little more than interest, the loss of her job and her husband’s ultimate skipping out of her life. And now what?

Lezcano refocuses the conversation rather sharply: “Do you realize what s--- legal system we have here in Spain?”

And then more softly, “You know, the main problem here is that people don’t believe that something like this is happening.”

“If you wanted credit as an individual or developer, it was just a matter of knocking on doors,” de Acuna says. “If the first bank didn’t give you the credit, go to the second or the third or the fourth. Sooner or later, you get the credit.”

The construction boom fuelled employment. Easy credit fed consumption. And the risk levels were only heightened as the banks strong-armed the country’s valuation companies to artificially inflate real estate values. It went like this: historically the recommended loan-to-value guideline for borrowers was set at 60 per cent. That galloped to 80 per cent.

“They took all those valuations aside and started to give all the way up to 100 per cent,” de Acuna says. And beyond. Between 2004 and the peak in 2008, valuation companies were over-valuating homes by as much as 20 to 30 per cent.

Here’s an ugly number. De Acuna’s real estate research firm, which has been crunching sector data since 1980, has tallied Spain’s surplus housing stock: 1.9 million units sit empty.

If the economy doesn’t worsen — and that’s a big if — there could be recovery here in Barcelona two or three years hence. Look south, however, and note the ghostly apparition of empty buildings dotting the coastal regions through the provinces of Castellon and Valencia and on. “Castellon is so overdeveloped we don’t see the probability of recovery in the next 20 years,” de Acuna says.

Travel further to Almeria, pretty and sparkling on Spain’s southern shore, where Banco Santander, one of the country’s largest banks, is selling off detached houses for €30,000 (roughly $38,000). “Most medium-sized cars here sell for more money,” notes de Acuna.

There is a term used by the Spanish banks that de Acuna translates as “the rattle effect,” meaning the sound of a baby rattle being shaken. “The banks receive envelopes in the offices and when they shake the envelopes they hear the rattle of the keys,” he says. “In the coastal areas many foreign purchasers gave the keys back thinking that was enough . . . It’s not that you give the keys and everything is solved. No, no, no.”

In situations such as Monique Friede’s, the bank will have little expectation of having the debt repaid. “The bank knows in most cases they won’t recover (the money),” says de Acuna. “But in reality what that means is that those people lose all their credit capacity . . . That woman is going to be on a credit report blacklist and that means her life is going to be quite troubled.”

A trim presence in a blue suit and Ray-Bans, Oliver-Alonso is an economics professor at the Autonomous University of Barcelona who can offer a tight-as-a-drum recount of the road to the euro from the ’60s, when the French, as he says, “wanted to dissolve the mighty German currency in a basket of southern currencies with less importance;” through the Werner Plan of 1970 (a first blueprint for European economic and monetary union); to the Maastricht Treaty on European union (those strictures we keep reading about limiting public debt to a maximum of 60 per cent of GDP and a national budget deficit of no more than 3 per cent of GDP); to the suddenly no-longer-fanciful notion that 50 years of history could be in for a seismic reset.

“If the euro fails, the European Union will fail also, and we will come back to the ’30s of the last century,” he says.

Previous postwar crises, before Spain joined what is now a 17-member eurozone, were addressed with conventional means. In response to the deep recession of the early ’90s, which saw the country lose 10 per cent of its labour force, Spain devalued its currency, the peseta, three times. “The mood was low,” says Oliver-Alonso in his understated way. “We had problems and knew that if we were not in the euro we would have more problems in the future . . . Europe is our natural land. Our future is Europe.”

Spain, perhaps surprisingly, wrangled its money house into shape in time to join the European Monetary Union in 1998. There were pragmatic reasons beyond emotional European brotherhood why that had to happen. “We knew that we needed external constraints in order to organize our economy better,” says Oliver-Alonso. “Left alone the Spanish economy tends to have high inflation, disequilibriums. This has been our history for the last century before joining the euro . . . We needed to get the country to be more competitive, to increase productivity, to put the country in constraints.”

But the union was not magical. “Our prices started to grow faster than the French and German. Our wages started to grow faster. Our productivity started to grow with less intensity.”

Some numbers: the total amount of household debt increased from €200 billion in 1998 to €900 billion in 2008. Bank credit to real estate and building companies exploded from €50 billion in 1998 to half a trillion euros a decade later, which is the clearest way of seeing how the country has come so close to the brink. The gross external debt increased from something on the order of €600 billion to €2.2 trillion.

The cratering of the housing market had explosive results: of the three million jobs lost as a result of the financial crisis, half were in the building sector and, adds Oliver-Alonso, a further 500,000 jobs were related to the building sector.

Rushing from a radio interview, part of a media blitz for the promotion of his just-released book on the euro crisis, Antoni Castells encapsulates the drama thusly: “When we went in the euro, I think that the less competitive countries didn’t calculate the imbalances, the mistakes in design the monetary union could produce. The political factor was very powerful. All the people wanted to be in the leading countries, the first-class countries.”

For Castells, the preferred way forward is clear. To exit the euro, to pursue the renationalization or rebalkanization of Europe, would be a “tragic solution,” he says. “An awful solution.”

The only possible option, he believes, is to build a real federal government in Europe with fully integrated markets (including a labour market integrated throughout the eurozone) and full fiscal union. “We have broken the legitimacy of Europe, because the people elected by the citizens don’t have power. The president of Spain? He doesn’t have power. The power is in Germany or Brussels. The people who have power have not been elected by the citizens. (German Chancellor) Angela Merkel? We have not elected Angela Merkel.”

It’s a common refrain.

It is Merkel, champion of austerity, who as of Thursday was still standing firm against the push by Spain’s prime minister, Mariano Rajoy, to ease the country’s pressures via a centrally supported buying up of Spanish (and Italian) bonds. “In the end we will see euro bonds,” predicts Oliver-Alonso boldly.

Merkel’s message to the market: not in her lifetime.

“The stereotypes have come true,” says Oliver-Alonso, rather sadly. “It’s true we are grossly in debt and they are not. My God, you can’t avoid that.”

“Is Canada beautiful?” and “Is Justin Bieber there?”

The lighting is dim — electricity bills are high, Friede says, quickly flicking off the lights after a tour through the space, a view of the simple kitchen, and then the bathroom with its ceiling speckled with black mould.

The flat is depressing. There is resignation now. “We don’t talk. It’s finished,” she says of her relationship with her once-friendly bank. “Now the bank gets the house.” He elder daughter sums up the family’s predicament thusly: “More trouble.”

There’s a word in Spanish. Quiebra. The bankruptcy. The crash. Outside an INEM office in Barcelona, where the unemployed go seeking work, Elyazi Aseyakhe speaks of those who have lost everything, those who had a nice life before. “Now it’s in the quiebra,” he says.

Friede awaits her eviction notice, her quiebra moment. Even that won’t satisfy her bank.

The Toronto Star and thestar.com, each property of Toronto Star Newspapers Limited, One Yonge Street, 4th Floor, Toronto, ON, M5E 1E6. You can unsubscribe at any time. Please contact us or see our privacy policy for more information.

More from the Toronto Star & Partners

LOADING

Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Republication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star articles, please go to: www.TorontoStarReprints.com